Dollar May Reverse Yen Gain on Slow Fed, Nomura Securities Says

By Yoshiaki Nohara and Kazumi Miura

March 26 (Bloomberg) -- The dollar may reverse gains versus the yen made over the past three months as the Federal Reserve will limit increases in interest rates through to the end of 2011, according to Nomura Securities Co.

The U.S.’s fragile economic outlook will prompt the Fed to keep the benchmark rate at a record low until next year, said Taisuke Tanaka, Tokyo-based head of foreign exchange research at Nomura, Japan’s biggest securities brokerage. Any increases in the rate over the next two years will be too slow to spur a sustainable rally in the dollar as the advantage over Japan’s borrowing costs will be too small, Tanaka said.

“When the Fed actually starts raising the rate, the dollar is likely to fall,” Tanaka said in an interview with Bloomberg News yesterday. “It will take a while before the rate difference gets big enough -- say 2 or 3 percent -- to attract foreign investments” to the U.S.

The dollar has risen 1.4 percent since Dec. 25 as evidence of an economic recovery prompted speculation the Fed will raise rates before policy makers in Japan and Europe. Initial jobless claims fell to the lowest level in six weeks as the rebound encourages U.S. companies to make fewer cuts in payrolls, a government report yesterday showed.

Benchmark Rates 

Benchmark borrowing costs are in a range between zero and 0.25 percent in the U.S. and 0.1 percent in Japan. The Fed will begin raising the federal funds target rate for overnight loans between banks in the third quarter of this year and lift it to 1.5 percent in the second quarter of 2011, according to analysts surveyed by Bloomberg News.

The dollar has fallen 6 percent against the yen over the past year and averaged 92.96 yen, compared with an average of 111.45 over the past 10 years, according to data compiled by Bloomberg. The U.S. currency fetched 92.55 yen as of 10:42 a.m. in Tokyo from 92.73 yen in New York yesterday.

The dollar may trade between 85 yen and 95 yen this year, Tanaka said. That’s more pessimistic than analysts in Bloomberg News surveys who expect the U.S. currency will advance to 98 yen by year-end. The greenback dropped to a 14-year low of 84.83 yen on Nov. 27.
The Bank of Japan will keep the key rate unchanged through the second quarter of 2011, according to analysts’ forecasts in a separate survey.


Any increase in the Fed benchmark may initially weigh down the greenback by driving down bond prices, reducing the allure of dollar-denominated assets, said Tanaka, who was first on this year’s rankings of interest-rate and currency analysts by Nikkei Veritas.

“A rate hike will cause bonds to be sold,” he said. “As low interest rates have kept up demand for equities, stocks will also fall for a while until the economy expands and companies’ earnings recover. The dollar will be sold.”

‘Too Early’ 

The dollar will extend declines against the yen in the long run, while there is a risk it may test higher prices toward the end of 2010, Tanaka said.
“If the economic recovery continues to be on track, the yen may weaken at times in accordance with expectations for the Fed’s rate increase,” Tanaka said. “But it’s still too early to think the dollar-yen will keep rising.”

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Kazumi Miura in Tokyo at Kmiura1@bloomberg.net.
Last Updated: March 25, 2010 21:47 EDT